By law, when a company becomes insolvent, then the director of that company will have a duty not to the shareholders, but to their creditors. This means that your first priority as a director is now to recoup your creditors’ money, as well as acting, to the best of your ability, in a way which does not deepen your debt. Taking out further credit when you know you may be insolvent, for example, can be considered wrongful trading and can lead to both disqualification as well as personal liability for the paying back of a company’s debts.
Do director’s have a duty to liquidate the company?
Making the choice to liquidate an insolvent company is a big step, and it shouldn’t be considered lightly. Ultimately, whether or not you should liquidate your company depends upon whether, realistically, there is a profitable future in your business. If the answer is no, then voluntary liquidating is often the next step and will certainly aid in a director’s duties to pay off his creditors. Directors who refuse to liquidate an insolvent company with no hope of paying off its debts can find themselves in court.
Another potential solution to avoid liquidation is to sell off and/or buy back your company’s assets, which may help you to pay off your company’s creditors. Insolvency legislation, which has been created with a view to supporting businesses and directors in a way which is positive for the UK economy, allows directors to buy back a company’s assets provided certain criteria are met.
Your company’s assets are not your assets
First of all, it’s important to clarify that the assets of your company are not yours, even if you funded or paid for them with your own money. A company’s assets and monies belong to the company itself, not the company’s director, and as such in cases of insolvency these assets are also owed to the company’s creditors. It’s possible to be considered a creditor to your own company after becoming insolvent, but this doesn’t guarantee that you will receive all or even some of the money that you put into the company, back.
How can I buy assets from my insolvent or liquidated companies?
Recent rulings by the High Court have reined in the rights of directors to buy back their company’s assets before liquidation, requiring that assets may be bought by company directors but only at fair market price. This is due to the recent legal case of System Building Services Group Ltd [2020], where the judge held that ‘the duties owed by a director to the company and its creditors survive the company’s entry into administration and voluntary liquidation’. In this case, the judge found that the company’s director, who had agreed to purchase a freehold property at below market value from the company’s administrator when he knew the company was insolvent, had acted in self-interest and failed in his director’s duties to the company’s creditors. The director was held liable and in breach of his fiduciary duty under the Companies Act 2006.
In other words, your duties to pay off your creditors will remain, and thus you may only legally buy back assets if you pay market value for them in order to give your creditors’ the best chance at recouping the money they are owed. This makes it harder for company directors to gain personally through the insolvency of their own companies, as well as ensuring that creditors are given a greater chance at recouping their lines of credit.
If you’re planning to buy some of your company’s assets in insolvency, usually an independent valuer can be hired to give correct and fair prices for assets without showing bias towards either you or your company’s creditors.
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